Insurers are worried by government proposals for welfare reform after they discovered that customers who prudently buy into self-provision may be penalised by the latest round of legislation.
Under the welfare reform bill, issued in February, those who have to claim incapacity benefit may lose out if they already have individual income protection (IP) and a private pension.
Under the new law, the government will assess the notional value of any pension as if it had been drawn down early. For every £1 over £50 per week of the notional pension, 50p of incapacity benefit would be deducted.
UNUM’s public relations officer, Andrew Smith, explained: “If you have both IP and a pension, you claim the IP and lose your State benefits.”
He continued: “But if you have just the pension, and have to draw it early, you’ll lose incapacity benefit of the same amount, but you’ll also be penalised by the actuarial reduction on the early pension.”
Last year, many insurers including UNUM, lobbied the government after it proposed the removal of incapacity benefit for consumers with group IP policies, a proposal that was subsequently not implemented.
“On the group IP side we were pleased that the government saw the need to work with the private sector,” said Smith. “On the individual side, these new proposals appear to be a penalty on prudence.”
UNUM is currently talking to the DSS regarding this position. Incapacity benefit is currently £66.75 per week or £3,471 per year.